Fear grips markets as China's Evergrande struggles with massive debt
After run of gains, fear has returned to stock market sentiment
Financial markets around the world had their worst day in weeks on Monday, as worries about embattled Chinese property developer Evergrande had investors worried about what the fallout might be.
The Toronto Stock Exchange was off by about 500 points, or about 2.5 per cent, nearing midday, while in New York the Dow Jones Industrial Average fell by 800 points for a similar percentage point drop.
The main catalyst for the gloom was Chinese property firm Evergrande, a real estate developer that appears to be crumbling under a $300 billion US debt load. The company missed an $80 million interest payment on its debts on Monday, and is poised to miss another bond payment on Thursday, which has prompted fears the company may default.
While a total collapse is unlikely, a potential violent unwinding of China's property bubble spooked investors around the world about where the reverberations may be felt.
"Fears that this could potentially ignite a wider financial crisis have been weighing on world markets to start the new trading week," said Colin Cieszynski, a strategist with SIA Weath in Toronto.
An 'area of uncertainty'
Financials were hit hardest, even though the vast majority of Evergrande's debt load is held by Chinese lenders.
"You're seeing the banks sell off most, because that's the area of uncertainty," said Kash Pashootan, CEO of Toronto-based investment firm First Avenue Investment Counsel. "Does this affect how they decide to lend moving forward? Do they have some of this on their books?"
While it's unlikely any major North American lenders have enough of Evergrande's debt on their books to make a major impact, when markets have risen so quickly, it doesn't take much debt to make investors fearful about whether or not things can keep going.
"It's less about the specific event — it's about investors deciding they want to take a step back and reassess how greed and fear play out over the coming quarters," Pashootan said. "It spreads to the psyche of the investor to say, 'You know what, I've done really well the last year and a half, I think it's time to take some profits off the table.'"
Evergrande may be the major catalyst, but investors are also casting an eye to the U.S. central bank, which is poised to reveal its latest decision on interest rates at a two-day meeting that starts on Tuesday. The bank is not expected to raise its rate from its current record low, but any indication that it may be getting closer to doing so makes markets jittery.
That's because "low interest rates are a real catalyst for basically every business," Pashootan said. Cheap money not only convinces businesses to borrow and invest, "but also even at the consumer level, low interest rates encourage consumers to buy bigger houses, spend more money on renovations and buy stuff."
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